Posted on: 21 February 2017
If you have decided to start trading stocks or are thinking of trying it out, then like most new investors, you are likely trying to figure out just how to make sure your investments pay off. While there is always some risks in investments, the risks can be lowered by learning just how the professionals make stock market predictions. Investment professionals make stock market predictions by using technical analysis, which means looking back at how the stock has performed over time to predict how it will perform in the future.
While there are many types of stock technical analysis, a popular one is based on Elliot Wave theory. Read on to learn more about Elliot Wave technical analysis and how to use it to your advantage when trading stocks to make wise investments in stocks and sell them at the right time to make a great profit.
Elliot Wave Theory: The Basics
Elliot Wave Theory was named after the man who created it, who was an accountant named Ralph Nelson Elliot. After spending years perfecting his new technical analysis theory, he finally published it in book format in 1938. While a classic form of stock technical analysis, financial advisers and investors still suggest or make many stock investments after taking this theory into account due to how well is has stood the test of time.
While the "Elliot" in the theory name is based on the creator of it, the word "wave" in the name is based on the quick spikes and declines in the price of a stock that appear similar to waves. By analyzing the past performance of many stocks, Elliot realized that each stock tended to have five large, or impulsive, waves as it rose or decreased in value over a larger period of time and, between each of these larger waves, there tended to be five smaller waves.
However, after the five large or impulsive waves that coincided with the general trend (whether it was gradually increasing or decreasing in value over time) of the stock, the stock tended to experience three "corrective" waves, which were waves that went in the opposite direction of the stock trend.
For example, if a stock on an upward trend that was gradually rising in value over time experienced five large waves, then it would then lose value over the course of the three corrective waves. In Elliot Wave Theory, these eight larger waves make up a complete market cycle.
While his theory is very detailed, just understanding this series of waves can help you make smart stock investments.
How to Use Elliot Wave Technical Analysis When Stock Trading
Even as a brand new trader, you surely know that the key to making money in the stock market is buying a stock when it is at a low price and selling it after it rises in value. How much you can use the Elliot Wave Theory to your advantage when trading depends on how long you would like to hold onto each stock. However, the creator of the theory does state that how long each stock wave lasts cannot be predicted, so when using Elliot Wave Theory during trading, it is best not to keep time in mind when deciding when to sell a stock.
However, the ideal time to buy a stock is when it will likely rise in value after purchasing it early on in (preferably before) the five wave cycle when it is rising in value. Then, sell it before it begins the three corrective waves when it will, in the end, likely lower in value.
How can you find out where the stocks you would like to invest in are in their 8-wave market cycles that the Elliot Wave Theory proposes? The easiest way is to check out an Elliot Wave technical analysis blog. Bloggers well-versed in the Elliot Wave Theory enjoy blogging about stock values and market predictions they have made based on the theory.
Of course, if you would prefer to learn Elliot Wave Theory in full detail and interpret it yourself, you can buy a book that explains it in full or take a technical analysis class to study it more in-depth.
If you have just decided to begin investing in the stock market or would like to but are apprehensive about taking the financial risk that stock investments typically come with, then realize that there are ways to reduce the risk of investing in the stock market, including learning stock market technical analysis theories like the Elliot Wave Theory. However, realize that there are many bloggers who enjoy helping others make great stock decisions, so check out an Elliot Wave technical analysis blog to get advice on what stocks are wise to invest in right now and why.Share